Hiring childcare has tax implications

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While the most important criteria in many parents' minds when they are looking for after-school child care is the relationship a provider has with the children and the family, there are serious tax implications to weigh as well.

"The financial side of the relationship is usually the last thing families think about when they hire a nanny," said Stephanie Breedlove, head of Care.com HomePay in Austin, Texas. "Also tax law is very complicated. Most families are not tax experts. So they just don't have an awareness of the tax requirements when they hire a nanny."

Putting a babysitter or nanny on the household payroll is not just for the rich and famous. Families with even part-time child care needs are required to pay payroll taxes and provide nannies with a W-2 form.

Following the rules when it comes to child care providers can also have tax benefits.

Howard Davis, president of the Downtown accounting firm Davis, Davis & Associates, said in households where both parents work, whatever money they spend for child care is eligible for a tax credit up to $3,000 for one child or up to $6,000 for two or more children.

But child care providers who come into the home must be treated as household employees, he said.

"It could create problems if the child care person comes into the house, because you have to treat them as an employee," Mr. Davis said. "That gets complicated. A lot of times the child care provider does not want to get into receiving a W-2 and have to report that income, even though that is the way it is supposed to be legally handled."

"When you put a nanny on the payroll you are entitled to a tax break [just like outside care] and your nanny receives important benefits, such as Social Security and Medicare credits for retirement and unemployment benefits if needed," Ms. Breedlove said.

"Because dual-income families have only been a force in society for about the last 25 years, and more dual-income families are hiring nannies to care for their children in their homes, it's a growing industry and a growing form of child care."

The Affordable Care Act complicates in-home child care because it will require every employee in the country to purchase health care -- and nannies are no exception.

"Nannies will be required to have health insurance and will likely be looking to families they work for to make this a part of their compensation or help with it," Ms. Breedlove said.

"That's coming for every American who does not have health insurance."